SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
+-+
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+-+ SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2004
OR
+-+
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+-+ SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- -------------------------------------------- ------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (843) 205-2000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
-----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. YES _X_ NO ___. -
The aggregate market value of the voting and non-voting common equity held
by non affiliates of the registrant, based upon the closing sales price of the
registrant's common stock as quoted on the NASDAQ System under the symbol "CFCP"
as of the last business day of the registrant's most recently completed second
fiscal quarter, was $233,791,553 (15,828,812) shares at $14.77 per share. It is
assumed for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.
As of December 8, 2004, there were issued and outstanding 15,935,128 shares
of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2004 (Parts I and II)
2. Portions of the Proxy Statement for the 2005 Annual Meeting of
Stockholders. (Part III)
1
PART I
Item 1. Business
- -----------------
General
Coastal Financial Corporation ("Coastal Financial" or the "Company") was
incorporated in the State of Delaware in June 1990, for the purpose of becoming
a savings and loan holding company for Coastal Federal Bank, formerly named
Coastal Federal Savings Bank, ("Coastal Federal" or the "Bank"). On January 28,
1991, the stockholders of the Bank approved a plan to reorganize the Bank into
the holding company form of ownership. The reorganization was completed on
November 6, 1991, on which date the Bank became the wholly-owned subsidiary of
the Company, and the stockholders of the Bank became stockholders of the
Company. Prior to completion of the reorganization, the Company had no material
assets or liabilities and engaged in no business activities. The financial
results contained herein relate primarily to the Company's principal subsidiary,
Coastal Federal.
Coastal Federal conducts its business from its main office in Myrtle Beach,
South Carolina, twelve additional branch offices located in South Carolina, and
five branch offices located in North Carolina. Coastal Federal expects to open
another office in Wilmington, N.C. in January 2005. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (843) 205-2000.
Coastal Federal's eighteen offices are located in Horry and Georgetown
Counties of South Carolina, and Brunswick and New Hanover Counties of North
Carolina. The economy of these four counties depends primarily on tourism. To
the extent area businesses rely heavily on tourism for business, decreased
tourism would have a significant adverse effect on Coastal Federal's primary
deposit base and lending area. Moreover, Coastal Federal would likely experience
a higher degree of loan delinquencies should the local economy be materially and
adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate consumer,
commercial business loans, commercial real estate loans and residential mortgage
loans.
The Company maintains an Internet website at http://www.coastalfederal.com.
-----------------------------
The Company makes available its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to such reports filed
or
2
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934, as amended, and other information related to the Company, free of
charge, on this site as soon as reasonably practicable after it electronically
files those documents with, or otherwise furnishes them to the SEC. The
Company's Internet website and the information contained therein or connected
thereto are not intended to be incorporated into this annual report on Form
10-K.
3
Rate/Volume Analysis
The following table sets forth certain information regarding changes to interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributed to (i) changes in rate (changes in rate
multiplied by old volume); (ii) changes in volume (changes in volume multiplied
by old rate), (iii) changes in rate-volume (change in rate multiplied by change
in volume), and (iv) the net change (the sum of the prior columns). Non-accrual
loans are included in the average volume calculations.
Year Ended September 30,
--------------------------------------------------------------------------------------------
2002 Compared to 2001 2003 Compared to 2002
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------------- --------------------------------------------
Rate Volume Rate/ Net Rate Volume Rate/ Net
---- ------ ----- --- ---- ------ ----- ---
Volume Volume
-------- -------- -------- -------- --------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Loans $ (6,372) $ 852 $ (118) $ (5,638) $ (4,869) $ 7,469 $ (903) $ 1,697
Mortgage-backed
Securities/Investments (1,943) 1,386 (187) (744) (2,695) 7,903 (1,564) 3,644
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in
income on interest-
earning assets (8,315) 2,238 (305) (6,382) (7,564) 15,372 (2,467) 5,341
-------- -------- -------- -------- -------- -------- -------- --------
Interest-Bearing
Liabilities:
Deposits (7,799) 3,629 (1,460) (5,630) (3,487) 2,333 (597) (1,751)
FHLB advance (1,486) (2,268) 303 (3,451) (1,271) 3,184 (527) 1,386
Repurchase
Agreements (1,811) (1,645) 1,060 (2,396) (4) 1,534 (13) 1,517
Other Borrowings -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in
expense on interest-
bearing liabilities (11,096) (284) (97) (11,477) (4,762) 7,051 (1,137) 1,152
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net
Interest income $ 2,781 $ 2,522 $ (208) $ 5,095 $ (2,802) $ 8,321 $ (1,330) $ 4,189
======== ======== ======== ======== ======== ======== ======== ========
Year Ended September 30,
-------------------------------------------
2004 Compared to 2003
Increase (Decrease)
Due to
-------------------------------------------
Rate Volume Rate/ Net
---- ------ ----- ---
Volume
-------- -------- -------- --------
Interest-Earning Assets:
Loans $ (3,082) $ 8,515 $ (626) $ 4,807
Mortgage-backed
Securities/Investments (383) 2,216 (49) 1,784
-------- -------- -------- --------
Total net change in
income on interest-
earning assets (3,465) 10,731 (675) 6,591
-------- -------- -------- --------
Interest-Bearing
Liabilities:
Deposits (2,233) 373 (115) (1,975)
FHLB advance (971) 2,942 (315) 1,656
Repurchase
Agreements (344) 925 (185) 396
Other Borrowings (46) 630 (135) 449
-------- -------- -------- --------
Total net change in
expense on interest-
bearing liabilities (3,594) 4,870 (750) 526
-------- -------- -------- --------
Net change in net
Interest income $ 129 $ 5,861 $ 75 $ 6,065
======== ======== ======== ========
4
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Non-accrual loans are
included in average balance calculations.
Year Ended September 30,
----------------------------------------------------------------------------------------------------
2002 2003 2004
-------------------------------- -------------------------------------------- ------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate (2) Balance Interest Rate (2) Balance Interest Rate (2)
------- ------- -------- -------- -------- -------- ------- -------- -------
(Dollars in thousands)
ASSETS
Loans $ 531,257 $ 40,261 7.58% $ 629,817 $ 41,958 6.67% $ 757,633 $ 46,765 6.17%
Mortgage-backed
Securities/Investments(1) 226,295 13,612 6.02 357,680 17,256 4.81 403,610 19,040 4.72
---------- ---------- ---- ---------- ---------- ---- ---------- ---------- ----
Total interest-earning
assets $ 757,552 $ 53,873 7.11% $ 987,497 $ 59,214 6.00% $1,161,243 $ 65,805 5.67%
========== ========== ==== ========== ========== ==== ========== ========== ====
LIABILITIES
Transaction accounts 309,624 4,524 1.46 369,871 3,925 1.06 418,405 3,331 0.80
Statement savings accounts 36,870 459 1.24 40,913 427 1.04 50,509 405 0.80
Certificate accounts 222,723 8,767 3.94 258,355 7,647 2.96 250,211 6,288 2.51
FHLB advances 150,239 7,682 5.11 212,501 9,068 4.27 281,437 10,724 3.81
Securities sold under
repurchase agreements 20,676 414 2.00 93,496 1,718 1.61 143,842 2,114 1.47
Other borrowings -- -- -- 3,792 213 5.62 15,000 662 4.41
---------- ---------- ---- ---------- ---------- ---- ---------- ---------- ----
Total interest-bearing
liabilities $ 740,132 $ 21,846 2.95% $ 978,928 $ 22,998 2.35% $1,159,404 $ 23,524 2.03%
========== ========== ==== ========== ========== ==== ========== ========== ====
Net interest income/
interest rate spread $ 32,027 4.16% $ 36,216 3.65% $ 42,281 3.64%
Net yield on interest earning
assets 4.23% 3.67% 3.64%
Ratio of interest earning assets
to interest-bearing
liabilities 1.02 1.01 1.00
- ----------------------------------------------------
(1) Includes short-term interest-bearing deposits, Federal funds sold, and
investments held to maturity.
(2) Average yield for investment classified as available-for-sale is computed
using historical cost balances and does not give effect to changes in fair
value that are reflected as a component of stockholders' equity.
5
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of consumer loans, commercial business loans, commercial real estate
loans and residential mortgage loans. The Bank originates construction and
permanent loans on single family and multi-unit dwellings, as well as on
commercial structures. The Bank emphasizes the origination of adjustable rate
residential and commercial real estate mortgages.
The Bank's net loan portfolio totaled approximately $799.0 million at
September 30, 2004, representing approximately 61.2% of its total assets. On
that date, approximately 40.6% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on the origination of adjustable rate
mortgages on residential and commercial properties; (ii) origination of
construction loans secured by residential properties, generally with terms for a
one-year period or less; and (iii) origination of commercial and consumer loans
having either adjustable rates or relatively short maturities. At September 30,
2004, adjustable rate loans constituted approximately $614.9 million (or 77.0%)
of the Bank's total loan portfolio. Therefore, at such date, fixed rate loans
comprised only 23.0% of the total loan portfolio. These lending practices are
intended to shorten the term of the Bank's assets and make the loan portfolio
more responsive to interest rate volatility.
The company has identified two concentrations of credit risk that it is
monitoring. The first involves loans for the acquisition of land and loans for
the development of land, which totaled $102.6 million as September 30, 2004 and
which are included in the mortgage Loans-Income property (commercial) line in
the loan Portfolio Analysis on the following page. The second involves permanent
mortgage loans secured by condominium properties, which totaled $65.6 million at
September 30, 2004 and is included in the Mortgage Loans-Single family to 4
family units line in the portfolio Analysis on the following page. See Note 1(h)
of the Notes to Consolidated Financial Statements in the Annual Report to
Shareholders for a complete discussion of this monitored credit risk.
6
Loan Portfolio Analysis
The following table set forth the composition of the Company's loan portfolio by
type of loan as of the dates indicated.
At September 30,
----------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------- ------------------ ------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction $ 54,905 10.13% $ 60,765 11.56% $ 45,544 7.99 $ 81,227 11.16 $ 93,292 11.23%
Single family to 4 family units 283,851 52.39 268,670 51.10 261,296 45.88 308,293 42.37 337,533 40.62
Income property (Commercial) 133,569 24.55 137,282 26.11 202,117 35.49 263,688 36.24 312,460 37.60
Commercial business loans 23,357 4.31 18,886 3.59 18,377 3.23 24,475 3.36 32,101 3.86
Consumer loans:
Mobile home 1,374 0.25 2,056 0.39 3,446 0.61 4,607 0.63 4,618 0.56
Automobiles 7,789 1.44 6,599 1.26 7,117 1.25 8,516 1.17 8,177 0.98
Equity lines of credit 23,009 4.25 22,379 4.26 24,273 4.26 26,639 3.66 30,906 3.72
Other 13,915 2.58 9,161 1.73 7,378 1.29 10,234 1.41 11,905 1.43
--------- ------ --------- ------ --------- ------ --------- ----- --------- -----
Total loans and loans
held for sale, gross $ 541,769 100.00% $ 525,798 100.00% $ 569,548 100.00 $ 727,679 100.00% $ 830,992 100.00%
====== ====== ====== ====== ======
Add (Subtract):
Loans in process (13,329) (13,983) (6,365) (16,570) (21,613)
Deferred loan costs, net 519 372 245 556 674
Allowance for loan losses (7,064) (7,159) (7,883) (9,832) (11,077)
--------- --------- --------- --------- ---------
Total loans and loans held
for sale, net $ 521,895 $ 505,028 $ 555,545 $ 701,833 $ 798,976
========= ========= ========= ========= =========
7
Commercial Business Loans. The Bank is permitted under OTS regulations to
make secured or unsecured loans for commercial, corporate, business or
agricultural purposes, including the issuance of letters of credit secured by
real estate, business equipment, inventories, accounts receivable and cash
equivalents. The aggregate amount of such loans outstanding may not exceed 20%
of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured basis with terms that generally do not exceed one
year. The majority of these loans have interest rates that adjust with changes
in the prime rate as published in The Wall Street Journal. The Bank's non-real
------------------------
estate commercial loans primarily consist of short-term loans for working
capital purposes, seasonal loans and lines of credit. The Bank customarily
requires a personal guaranty of payment by the principals of any borrowing
entity and reviews the financial statements and income tax returns of the
guarantors. At September 30, 2004, the Bank had $32.1 million outstanding in
commercial business loans, which represented approximately 3.9% of its loan
portfolio and 2.5% of total assets.
Commercial business lending is inherently riskier than secured mortgage
lending and involves risks that are different from those associated with
residential and commercial real estate lending. Real estate lending is generally
considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of such collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete, of limited use, or have limited
marketability, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and potentially
insufficient source of repayment.
Commercial Real Estate Loans. The Bank may invest, by OTS regulation, in
non-residential real estate loans up to 400% of its capital as computed under
GAAP plus general loan loss reserves. At September 30, 2004, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$408.3 million. At such date, the Bank had non-residential real estate loans
outstanding of $312.5 million compared to $263.7 million at September 30, 2003.
During fiscal 2001 through 2004, the Bank opened seven offices. The Bank hired
commercial lending officers to lead many of these offices and intends to have
commercial lending officers leading a majority of its banking offices. As a
result of this focus, the Bank has approximately doubled the number of its
commercial lending officers
8
over the last two years. The Bank expects to continue to focus significant
origination efforts in commercial real estate and commercial lending. It is
expected that the Bank's commercial real estate loans will continue to comprise
the most significant portion of the Bank's loan growth in future years.
The commercial real estate loans originated by the Bank are primarily
secured by shopping centers, office buildings, warehouse facilities, retail
outlets, hotels, motels and multi-family apartment buildings. The interest rate
of the commercial real estate loans presently offered by the Bank generally
adjusts every one, three or five years and is indexed to U.S. Treasury
securities or adjusts monthly indexed to the prime interest rate. Such loans
generally have a fifteen to twenty year term, with the payments based on a
similar amortization schedule. In many cases, the Bank may require the loan to
include a call option at the Bank's option in three to ten years. The Bank
generally requires that such loans have a minimum debt service coverage of 120%
of projected net operating income together with other generally accepted
underwriting criteria.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry and
Georgetown Counties, South Carolina and Brunswick and New Hanover Counties,
North Carolina. Additionally, the Bank has, on a limited basis, originated
commercial real estate loans secured by properties located in other parts of
North and South Carolina.
Consumer Loans. The Bank is permitted by OTS regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four family residences, amounted to $55.6 million, or 6.7% of the
total loan portfolio, and 4.3% of total assets, at September 30, 2004.
Coastal Federal offers consumer loans in order to provide a wider range of
financial services to its customers. These loans also
9
have a shorter term and normally higher interest rates than residential real
estate loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets which may depreciate rapidly, such as automobiles, boats and other moving
vehicles. In such cases, repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability and, thus, are more
likely to be adversely affected by job loss, a change in family status such as
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount recoverable on such loans. Such loans may also give
rise to claims and defenses by the borrower against Coastal Federal as the
holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Residential Mortgage Loans. The Bank originates loans to enable borrowers
to purchase existing homes or residential lots, refinance existing mortgage
loans or construct new homes. Residential mortgage loans originated by the Bank
are generally long-term loans, amortized on a monthly basis, with principal and
interest due each month. The contractual loan payment period for residential
mortgage loans typically ranges from 10 to 30 years. The Bank's experience
indicates that real estate loans remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option, subject to any prepayment penalty provisions included in the note.
The Bank generally requires mortgagee title insurance on all single-family first
mortgage and residential mortgage loans.
The Bank offers adjustable rate residential mortgage loans ("ARMs"), the
interest rates of which generally adjust based upon treasury securities indices.
Although Coastal Federal's ARMs are beneficial in helping the Bank improve the
interest rate sensitivity of its assets, such loans may pose potential
additional risks to Coastal Federal. A precipitous increase in interest rates
could be expected to result in an increase in delinquencies or defaults on such
loans, whereas a significant decrease in rates could cause repayments to
increase significantly.
Coastal Federal also offers residential mortgage loans with fixed rates of
interest. These loans generally can be sold in the secondary market or are
portfolio loans where the Bank offers such loans at rates somewhat above
conforming loan rates. In addition, Coastal Federal securitized loans into FHLMC
mortgage-backed
10
securities of $95.6 million and $46.8 million in 2003 and 2004, respectively.
The securitized mortgage-backed securities were generally sold in the secondary
market within a few days of securitization.
At September 30, 2004, approximately $337.5 million or 40.6% of the Bank's
loan portfolio, and 25.9% of total assets, consisted of one-to-four family
residential loans.
Construction Loans. The Bank originates residential construction loans that
generally have a term of six to twelve months for individuals or one year for
builders. The individual's loans are generally tied to a commitment by the Bank
to provide permanent financing upon completion of construction. The interest
rate charged on construction loans is indexed to the prime rate as published in
The Wall Street Journal or the current permanent loan rate and varies depending
- -----------------------
on the terms of the loan and the loan amount. The Bank customarily requires
personal guaranties of payment from the principals of the borrowing entities.
The interest rate on commercial real estate construction loans presently
offered by the Bank is generally indexed to the prime rate as published in The
---
Wall Street Journal. Residential and commercial real estate construction
- ---------------------
financing generally expose the Bank to a greater risk of loss than long-term
financing on improved, occupied real estate, due in part to the fact that the
loans are underwritten on projected, rather than historical, income and rental
results. The Bank's risk of loss on such loans generally depends largely upon
the accuracy of the initial appraisal of the property's value at completion of
construction and the estimated cost (including interest) of completion. If
either estimate proves to have been inaccurate and the borrower is unable to
provide additional funds pursuant to his guaranty, the lender either may be
required to advance funds beyond the amount originally committed to permit
completion of the development and/or be confronted at the maturity of the loan
with a project whose value is insufficient to assure full repayment. Coastal
Federal generally provides a permanent financing commitment on residential and
commercial properties at the time the Bank provides the construction financing.
The Bank's underwriting criteria are designed to evaluate and to minimize
the risks of each residential and commercial real estate construction loan. The
Bank considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
11
At September 30, 2004, approximately $93.3 million or 11.2% of the Bank's
gross loan portfolio consisted of construction loans on both residential ($82.8
million) and commercial properties ($10.5 million). Undisbursed proceeds on
these loans amounted to $21.6 million at September 30, 2004.
12
Loan Maturity
The following table sets forth certain information at September 30, 2004
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on their contractual terms to maturity including scheduled payments and
potential prepayments. Specific prepayment speeds applied to loans are a
function of their underlying coupons, lifetime rate caps and maturities. Demand
loans (without a stated maturity), loans having no stated schedule of repayments
and no stated maturity and overdrafts are reported as due in one year or less.
More than
One Year
One Year Through More than
or Less Five Years Five Years Totals
------- ---------- ---------- ------
(In thousands)
First mortgage loans $ 224,383 $ 271,260 $ 37,544 $ 533,187
Other residential and
non-residential 64,353 104,445 19,687 188,485
Equity lines of credit 29,464 1,442 -- 30,906
Consumer loans 7,710 16,208 782 24,700
Commercial loans 17,820 14,281 -- 32,101
--------- --------- --------- ---------
Total loans $ 343,730 $ 407,636 $ 58,013 $ 809,379
========= ========= ========= =========
Add (Subtract):
Deferred loan costs, net 674
Allowance for loan losses (11,077)
---------
Total loans, net $ 798,976
=========
The following table sets forth the dollar amount of all loans expected to
be repaid one year or later after September 30, 2004, which have fixed interest
rates and those which have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Totals
----- ---------------- ------
(In thousands)
First mortgage loans $ 88,743 $220,061 $308,804
Other residential and
non-residential 19,306 104,826 124,132
Equity lines of credit 1,442 -- 1,442
Consumer loans 10,773 6,217 16,990
Commercial loans 6,890 7,391 14,281
-------- -------- --------
Total loans $127,154 $338,495 $465,649
======== ======== ========
13
Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from the communities it serves. Detailed loan applications are
obtained to determine the borrower's ability to repay, and more significant
items on these applications are verified. After analysis of the loan application
and property or collateral involved, including an independent appraisal of
property, the Bank's underwriter or Credit Administration Group reviews the
loan, and the Bank makes a lending decision. With respect to commercial loans,
the Bank also reviews the capital adequacy of the business, the ability of the
borrower to repay the loan and honor its other obligations and general economic
and industry conditions. Loans are approved based on size, requiring higher
levels of authorization for larger dollar loan amounts. A member of the Bank's
Internal Loan Committee must approve all residential mortgage loan applications
in excess of 80% of the lesser of appraised value or purchase price of the
property, unless the borrowers have private mortgage insurance.
The Bank's general policy is to obtain customary title and flood insurance
on real estate loans. Borrowers must also obtain paid hazard insurance policies
prior to closing. Borrowers on residential mortgage loans, which exceed 80% of
the value of the security property, are also generally required to escrow funds
on a monthly basis for real estate taxes, hazard insurance premiums, and private
mortgage insurance premiums.
Residential Mortgage Loan Originations, Purchases and Sales. The Bank may,
depending on economic conditions, purchase or sell mortgage loans to manage the
interest rate sensitivity of interest-earning assets and interest-bearing
liabilities, to provide additional funding for lending activities, and generate
service fee income. The Bank retains a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.
Loan Commitments. The Bank, upon the submission of a loan application,
generally provides a 45-day written commitment as to the interest rate
applicable to such loan. If the loan has not been closed within 45 days, the
rate may be adjusted to reflect current market conditions at the Bank's option.
Loans that require closing time in excess of 45 days from the date of
application are issued a written commitment, with a term ranging from three to
six months. For fixed rate loans, the Bank charges either a higher interest rate
or points to lock in the rate for 180 days. Refer to page 23 of the Annual
Report for more information.
Delinquencies. Coastal Federal's collection procedures provide for a series
of contacts with delinquent borrowers. If the delinquency continues, more formal
efforts are made to contact the delinquent borrower. If a residential mortgage
loan continues in a delinquent status for 90 days or more, Coastal Federal
generally initiates foreclosure proceedings. Coastal Federal generally initiates
collection activities on a commercial mortgage loan if the loan continues in a
delinquent status for 30 days or more. In certain limited instances, however,
Coastal Federal may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs.
14
Problem Assets and Asset Classification. Loans are reviewed on a regular
basis and a reserve for uncollectible interest is established on loans where
collection of interest is questionable, generally when such loans become 90 days
delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At September 30,
-------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential $2,080 $1,554 $ 785 $3,538 $3,852
Commercial 2,478 1,185 18 2,816 1,106
Commercial business -- 322 2,423 793 783
Consumer 224 193 288 302 115
------ ------ ------ ------ ------
Total 4,782 3,254 3,514 7,449 5,856
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Real estate -
Residential -- -- -- -- --
Commercial -- -- -- -- --
Commercial business -- -- -- -- --
Consumer -- -- -- -- --
------ ------ ------ ------ ------
Total -- -- -- -- --
------ ------ ------ ------ ------
Restructured loans 419 1,693 970 369 731
Real estate owned, net 867 2,363 1,046 1,627 785
Other nonperforming assets -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets $6,068 $7,310 $5,530 $9,445 $7,372
====== ====== ====== ====== ======
Total nonaccrual loans to
net loans 0.92% 0.64% 0.63% 1.06% 0.73%
Total nonaccrual loans to
total assets 0.62% 0.43% 0.37% 0.63% 0.45%
Total nonperforming assets
to total assets 0.79% 0.96% 0.58% 0.80% 0.56%
Total nonperforming assets,excluding
restructured loans which are generally
performing under the restructured terms, to
total assets 0.73% 0.74% 0.48% 0.77% 0.51%
15
Please refer to page 23 of the Annual Report for additional information on
impaired loans and lost interest income.
The allowance for uncollectible interest which is netted against accrued
interest receivable totaled $691,000 and $605,000 at September 30, 2003 and
2004, respectively.
OTS regulations require that each insured institution review and classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require them to be classified. There are four
classifications for problem assets: special mention, substandard, doubtful and
loss. Assets categorized as special mention have potential credit weakness and
require close management attention, but are not yet classified further. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had five individually classified assets in excess of $1.3
million as of September 30, 2004. At that date, classified assets amounted to
$26.3 million ($10.8 million substandard; $908,000 doubtful; and $14.6 million
special mention). Substandard assets consist primarily of twenty-four loans with
aggregate balances of approximately $8.2 million at September 30, 2004. The
largest amount to any one borrower was $1.1 million. Special mention assets
consist primarily of twenty-eight loans with aggregate balances of approximately
$13.8 million at September 30, 2004.
Allowance for Loan Losses. The adequacy of the allowance is analyzed on a
quarterly basis. For purposes of this analysis, adequacy is defined as a level
of reserves sufficient to absorb probable losses inherent in the loan portfolio.
The methodology employed for this analysis considers historical loan loss
experience, the results of loan reviews, current economic conditions, and other
qualitative and quantitative factors that warrant current consideration in
determining an adequate allowance.
The evaluation of the allowance is segregated into general allocations and
specific allocations. For general allocations, the portfolio is segregated into
risk-similar segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans. To allow for
modeling error, a range of probable loss ratios is then derived for each
segment. The resulting percentages are then applied to the dollar amounts of the
loans in each segment to arrive at each segment's range of probable loss levels.
16
Certain nonperforming loans are individually assessed for impairment under
SFAS 114 and assigned specific allocations. Other identified high-risk loans or
credit relationships based on internal risk ratings are also individually
assessed and assigned specific allocations.
The general allocation also includes a component for probable losses
inherent in the portfolio, based on management's analysis, that are not fully
captured elsewhere in the allowance. This component serves to address the
inherent estimation and imprecision risk in the methodology as well as address
management's evaluation of various factors or conditions not otherwise directly
measured in the evaluation of the general and specific allocations. Such factors
or conditions may include evaluation of current general economic and business
conditions; geographic, collateral, or other concentrations; system, procedural,
policy, or underwriting changes; experience of lending staff; entry into new
markets or new product offerings; and results from internal and external
portfolio examinations.
The allocation of the allowance to the respective loan segments is an
approximation and not necessarily indicative of future losses or future
allocations. The entire allowance is available to absorb losses occurring in the
overall loan portfolio.
Assessing the adequacy of the allowance is a process that requires
considerable judgment. Management's methodology and judgments are based on the
information currently available and includes numerous assumptions about current
events, which are believed to be reasonable, but which may or may not be valid.
Thus, there can be no assurance that loan losses in future periods will not
exceed the current allowance amount or that future increases in the allowance
will not be required. No assurance can be given that management's ongoing
evaluation of the loan portfolio in light of changing economic conditions and
other relevant circumstances will not require significant future additions to
the allowance, thus adversely affecting the operating results of the Company.
Management believes that the current level of the allowance for loan losses is
presently adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors.
The allowance is also subject to examination and adequacy testing by
regulatory agencies, which may consider such factors as the methodology used to
determine adequacy and the size of the allowance relative to that of peer
institutions, and other adequacy tests. In addition, such regulatory agencies
could require management to adjust the allowance based on information available
to them at the time of their examination.
See Note 4 of the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis - Non-Performing Assets" in the 2004
Annual Report to Stockholders attached hereto and incorporated by reference.
17
Loan Loss Allowance Analysis
The following table sets forth analysis of the Company's allowance for loan
losses for the periods indicated. Where specific loan loss reserves have been
established, any difference between the loss reserve and the amount of the loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
Year Ended September 30,
----------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- -----
(Dollars in thousands)
Allowance at beginning of
period $ 6,430 $ 7,064 $ 7,159 $ 7,883 $ 9,832
Allowance recorded on
acquired loans 50 -- -- -- --
Sale of Florence office loans (75) -- -- -- --
Provision for loan losses 978 955 1,235 2,655 1,750
------- ------- ------- ------- -------
Recoveries:
Residential loans 12 3 4 -- --
Commercial loans -- -- -- 92 200
Construction loans -- -- -- -- --
Consumer loans 65 57 62 44 49
------- ------- ------- ------- -------
Total recoveries 77 60 66 136 249
------- ------- ------- ------- -------
Charge-offs:
Residential loans 28 167 -- 46 --
Commercial loans -- 226 90 388 268
Construction loans -- -- -- -- --
Consumer loans 368 527 487 408 486
------- ------- ------- ------- -------
Total charge-offs 396 920 577 842 754
------- ------- ------- ------- -------
Net charge-offs 319 860 511 706 505
------- ------- ------- ------- -------
Allowance at end of period $ 7,064 $ 7,159 $ 7,883 $ 9,832 $11,077
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period 1.35% 1.42% 1.42% 1.40% 1.39%
Ratio of net charge-offs
to average loans outstanding
during the period 0.06% 0.17% 0.10% 0.11% 0.07%
18
Loan Loss Allowance by Category
I The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.
September 30,
------------------------------------------------------------------------------------------------------------
2000 2001 2002
----------------------------------- ---------------------------------- ---------------------------------
As a % Loan Type As a % Loan Type As a % Loan Type
of out- As a % of out- As a % of out- As a %
standing of out- standing of out- standing of out-
loans in standing loans in standing loans in standing
Amount category loans Amount category loans Amount category loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
Residential $2,081 0.60% 66.53% $2,148 0.65% 65.55% $2,272 0.72% 57.08%
Commercial 4,719 3.01 30.07 4,893 3.13 30.92 5,273 2.39 39.69
Consumer 264 1.49 3.40 118 0.66 3.53 338 1.88 3.23
------ ----- ------ ----- ------ -----
Total Allowance for
loan losses $7,064 1.35% 100.00% $7,159 1.42% 100.00% $7,883 1.42% 100.00%
====== ====== ====== ====== ====== ======
September 30,
-----------------------------------------------------------------------
2003 2004
----------------------------------- ----------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Residential $ 1,992 0.61% 55.61% $ 1,007 0.23% 53.78%
Commercial 7,229 2.51 41.06 9,222 2.68 43.13
Consumer 611 2.62 3.33 848 3.43 3.09
------- ----- ------- -----
Total Allowance for
loan losses $ 9,832 1.40% 100.00% $11,077 1.39% 100.00%
======= ====== ======= ======
19
Investment Activities
Under OTS regulations, the Bank has authority to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB of
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, such
regulated institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds, the assets of which conform
to the investments that OTS-chartered institutions are otherwise authorized to
make directly. These institutions are also required to maintain minimum levels
of liquid assets which vary from time to time. See "Regulation and Supervision -
Federal Home Loan Bank System." The Bank may decide to increase its liquidity
above the required levels depending upon the availability of funds and
comparative yields on investments in relation to return on loans.
Coastal Federal is required under federal regulations to maintain a minimum
amount of liquid assets and is also permitted to make certain other securities
investments. See "Regulation and Supervision" herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in the Annual Report.
Investment decisions are made in accordance with the Bank's approved
Investment Policy by the Investment Officer who reports quarterly to the
Asset/Liability Management Committee ("ALCO Committee"). The ALCO Committee
meets quarterly and consists of Directors Creel, Bishop, Thompson, Clemmons and
Gerald, and Executive Vice Presidents Graham, Rexroad, Douglas, Sherry and
Stalvey and Vice President Loehr. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 2004, the Bank's
investment portfolio had a market value of approximately $405.6 million. The
investment securities portfolio consisted primarily of mortgage-backed
securities. For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to Consolidated Financial Statements attached
hereto and incorporated by reference.
At September 30, 2004, Coastal Federal did not own any securities, other
than those disclosed in the Securities Analysis to follow, which had an
aggregate book value in excess of 10% of its stockholder's equity at that date.
20
Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.
September 30,
-------------
2002 2003 2004
---- ---- ----
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
U.S. Government agency Securities:
FNMA -- -- -- -- $ 1,951 6.32%
FHLB $ 1,998 100.00% $ 1,998 12.38% 8,790 28.48
State and municipal
Obligations -- -- 14,141 87.62 20,123 65.20
------ ------ ------- ------- ------- ---------
Total $ 1,998 100.00% $16,139 100.00% $30,864 100.00%
======= ====== ======= ====== ======= =========
(1) The market value of the Bank's investment securities portfolio amounted to
$2.0 million, $15.9 million and $31.3 million at September 30, 2002, 2003
and 2004, respectively.
The following table sets forth the final maturities and weighted average
yields of the securities at amortized cost at September 30, 2004.
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years
------- ------------- - ------------ ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government agency securities:
FNMA $ -- --% $ -- --% $ 1,951 5.00% $ -- --%
FHLB (2) -- -- -- -- 7,840 13.87 950 4.25
State and municipal
Obligations (3) -- -- -- -- 3,578 3.98 16,545 4.21
---- ---- ------ ---- ------- ---- ------- ----
Total $ -- --% $ -- --% $13,369 9.98% $17,495 4.22%
==== ==== ====== ==== ======= ==== ======= ====
(2) All assets in the preceding table are classified as available for sale,
with the exception of the FHLB bond with a cost of $7,840 shown in the
More than Five to Ten Year Category, which is classified as held to
maturity.
(3) The yield on state and municipal obligations is not computed on a tax
equivalent basis.
21
The following table sets forth Coastal Federal's mortgage-backed securities
portfolio, at amortized cost, at the dates indicated.
September 30,
----------------------------------------------------------------------------------
2002 2003 2004
------------------------ ------------------------ -------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
-------- --------- --------- ---------- --------- ----------
(Dollars in thousands)
Mortgage-backed Securities:
FHLMC $ 57,628 17.87% $133,674 35.44% $114,947 30.97%
FNMA 206,448 64.01 205,200 54.41 162,371 43.75
GNMA 22,139 6.86 26,659 7.07 42,205 11.37
CMO 36,320 11.26 11,617 3.08 51,644 13.91
-------- ------ -------- ------ -------- ------
Total $322,535 100.00% $377,150 100.00% $371,167 100.00%
======== ====== ======== ====== ======== ======
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $331.8 million, $383.3 million and $374.3 million at September
30, 2002, 2003 and 2004, respectively.
The following table sets forth the maturities and weighted average yields of the
securities, at amortized cost, at September 30, 2004.
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years
------------------ --------------- ------------------- ---------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-backed
Securities;
FHLMC $ -- --% $ -- --% $ -- --% $114,947 5.21%
FNMA -- -- -- -- 3,196 3.52 159,175 5.61
GNMA -- -- -- -- -- -- 42,205 5.09
CMO -- -- -- -- -- -- 51,644 4.82
----- ----- ----- ----- -------- -------- -------- ----
Total $ -- --% $ -- --% $ 3,196 3.52% $367,971 5.31%
===== ===== ===== ===== ======== ======== ======== ====
22
Service Corporation Activities
The Company has four wholly-owned subsidiaries, Coastal Federal Bank,
Coastal Financial Capital Trust I (see Note 11 of the Notes to the Consolidated
Financial Statements), Coastal Planners Holding Corporation, and Coastal
Investor Services, Inc (inactive).
Coastal Federal Bank has two wholly-owned subsidiaries: Coastal Mortgage
Bankers and Realty Co., Inc. ("Coastal Mortgage Bankers"), which was
incorporated in 1970 under the laws of South Carolina, and Coastal Federal
Holding Corporation ("CHFC"), which was incorporated in 1998 under the laws of
Delaware. As of September 30, 2004, Coastal Mortgage Bankers has one first tier
subsidiary, Sherwood Development Corporation, which is inactive. Four other
inactive subsidiaries, North Beach Investments, Inc., Shady Forest Development
Corporation, Ridge Development Corporation, and 501 Development Corporation,
were dissolved on September 30, 2004. Coastal Mortgage Bankers is not active in
any real estate operations.
On February 20, 1998, Coastal Real Estate Investment Corporation ("CREIC")
was incorporated in North Carolina. CREIC is a wholly-owned operating subsidiary
of CFHC and is a real estate investment trust ("REIT"). CREIC engages in the
investment in, and management of, real estate related assets, primarily mortgage
loans. CFHC engages in the management of its investment in CREIC and the
management of the related dividends received on that investment. On September 1,
1998, CREIC was capitalized with approximately $131.8 million of mortgage loans
from Coastal Federal. On December 10, 1998, CREIC became a wholly-owned
subsidiary of CFHC through an exchange of stock transaction. On January 10,
2002, January 10, 2003 and January 24, 2003, CREIC received capital
contributions from CFHC of $35.0 million, $50.0 million and $50.0 million,
respectively, to purchase loans.
Coastal Federal Capital Trust I was formed as a statutory trust under the
laws of the state of Delaware, for the purpose of issuing capital securities to
institutional investors in a trust preferred issue. During 2004, the Company
deconsolidated the Trust for financial reporting purposes as a result the
Financial Accounting Standards Board Interpretation No. 46 "Consolidation of
Variable Interest Entities". Refer to Note 11 of the Notes to Consolidated
Financial Statements for further information.
Coastal Planners Holding Corporation has one subsidiary, Coastal
Retirement, Estate and Tax Planners, Inc., which was formed during the forth
quarter of 2003 and offers objective, fee-based financial planning and tax
preparation services.
23
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of Coastal
Federal's funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used to compensate for reductions in the
availability of funds from other sources. They may also be used for general
business purposes.
Deposit Accounts. Deposits are attracted from within Coastal Federal's
primary market area through the offering of a broad selection of deposit
instruments, including checking accounts, money market accounts, savings
accounts, certificates of deposit and retirement accounts. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, Coastal Federal considers the rates offered by
its competition, profitability to Coastal Federal, matching deposit and loan
products and its customer preferences and concerns. Coastal Federal generally
reviews its deposit mix and pricing at least monthly.
Time Deposits with balances of $100,000 or More
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 2004.
Amount Due
- -----------------------------------------------------------------------------------------------------------
Within Over 3 Over 6 Over 12 Total
3 Months through 6 months through 12 months Months
- -----------------------------------------------------------------------------------------------------------
(In thousands)
$29,502 $27,616 $26,050 $10,670 $93,838
======= ======= ======= ======= =======
24
Deposit Flow
The following table sets forth the balances of deposits in the various types
of deposit accounts offered by the Bank at the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------------
2002 2003 2004
-------------------------------------------------------------------------------------------------------
Percent Increase Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease) Amount of Total (Decrease)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
(Dollars in thousands)
Transaction accounts:
NOW checking $ 67,381 10.58% $ 11,455 $ 98,171 14.08% $ 30,790 $ 110,802 14.71% $ 12,631
Noninterest-bearing
checking 63,003 9.89 13,905 86,258 12.38 23,255 122,357 16.24 36,099
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total transaction accounts 130,384 20.47 25,360 184,429 26.46 54,045 233,159 30.95 48,730
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Money market demand accounts 212,924 33.42 19,293 206,010 29.56 (6,914) 224,437 29.79 18,427
Savings accounts 39,092 6.13 5,775 46,236 6.63 7,144 55,205 7.33 8,969
Fixed-rate certificates
(original maturity):
3 months 4,968 0.78 1,279 3,477 0.50 (1,491) 3,865 .51 388
6 months 90,177 14.15 43,051 82,349 11.81 (7,828) 33,052 4.39 (49,297)
9 months 17,613 2.76 (12,567) 6,702 .96 (10,911) 51,159 6.79 44,457
12 months 57,206 8.98 12,340 57,777 8.29 571 57,696 7.66 (81)
18 months 30,994 4.87 (644) 46,044 6.61 15,050 37,978 5.04 (8,066)
24 months 27,939 4.39 2,819 36,313 5.21 8,374 28,264 3.75 (8,049)
30 months 3,041 0.48 290 2,923 0.42 (118) 2,673 .35 (250)
36 months 11,580 1.82 9,286 11,649 1.67 69 11,559 1.53 (90)
48 months 7,936 1.25 1,350 10,108 1.45 2,172 11,662 1.55 1,554
60 months 19 0.00 1 20 0.00 1 -- -- (20)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
251,473 39.48 57,205 257,362 36.92 5,889 237,908 31.57 (19,454)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Variable rate certificates:
(original maturity)
12 months 163 0.02 163 130 0.02 (33) 161 .02 31
18 months 1,471 0.23 (675) 1,311 0.19 (160) 1,115 .15 (196)
30 months 1,574 0.25 (404) 1,534 0.22 (40) 1,394 .19 (140)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total variable 3,208 0.50 (916) 2,975 0.43 (233) 2,670 .36 (305)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total certificates 254,681 39.98 56,289 260,337 37.35 5,656 240,578 31.93 (19,759)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total deposits $ 637,081 100.00% $ 106,717 $ 697,012 100.00% $ 59,931 $ 753,379 100.00% $ 56,367
========= ====== ========= ========= ====== ========= ========= ====== =========
25
Borrowings. Demand and time deposits are the primary source of funds for
Coastal Federal's lending and investment activities and for its general business
purposes. The Bank has in the past, however, relied upon advances from the FHLB
of Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta has served as one of the Bank's
primary borrowing sources. Advances from the FHLB of Atlanta are typically
secured by the Bank's first mortgage loans and certain of the Bank's
mortgage-backed securities portfolio. At September 30, 2004, Coastal Federal had
advances totaling $ 328.5 million from the FHLB of Atlanta due on various dates
through 2018 with a weighted average interest rate of 3.64%. Certain of these
advances are subject to call provisions. Call provisions are more likely to be
exercised by the FHLB when rates rise. See Note 9 in the Notes to the
Consolidated Financial Statements of the 2004 Annual Report to Shareholders for
further information on the call provisions of various FHLB advances.
The FHLB of Atlanta functions as a central reserve bank providing credit
for financial institutions and certain other member financial institutions. As a
member, Coastal Federal is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances on the security of such stock and
certain of its mortgage loans, certain commercial real estate loans, and other
assets (principally securities which are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. The FHLB of Atlanta determines specific lines of credit for each member
institution.
In addition to the borrowing described above, the Bank may borrow funds
under reverse repurchase agreements pursuant to which it sells securities
(generally secured by government securities and mortgage-backed securities)
under an agreement to buy them back at a specified price at a later date. These
agreements to repurchase are deemed to be borrowings collateralized by the
securities sold. At September 30, 2004, the Company had repurchase agreement
lines of credit and available collateral consisting of investment securities and
mortgage-backed securities of $68.4 million, as well as federal funds lines
available of $20.0 million.
The Company had $15.5 million of junior subordinated debentures outstanding
on September 30, 2004. For more information on these debentures, please see Note
11 of the Notes to the Consolidated Financial Statements in the 2004 Annual
Report to Stockholders attached hereto and incorporated by reference.
26
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
At September 30,
---------------------------------------------
2002 2003 2004
---------- ----------- ----------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer $ 4,070 $ 7,703 $ 12,931
Broker 30,000 125,899 94,242
Short-term FHLB advances (1) 110,350 91,435 147,500
Weighted average rate(at month end)paid on:
Securities sold under agreements
to repurchase:
Customer 1.37% 0.81% 1.42%
Broker 1.84 1.64 1.74
Short-term FHLB advances (1) 4.52 3.81 4.15
Maximum amount of borrowings outstanding
At any month end:
Securities sold under agreements
to repurchase:
Customer $ 5,625 $ 7,703 $ 12,931
Broker 30,000 125,899 184,129
Short-term FHLB advances (1) 110,350 121,582 159,735
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer $ 3,600 $ 4,812 $ 9,033
Broker 15,007 92,476 134,809
Short-term FHLB advances (1) 59,243 86,191 103,360
Weighted average rate (year to date)paid on:
Securities sold under agreements
to repurchase:
Customer 1.58% 1.02% 1.01%
Broker 2.39 2.04 1.50
Short-term FHLB advances (1) 4.52 3.81 4.15
(1) Short-term FHLB advances include various advances which are subject to call
by FHLB within one year.
27
29
Competition
As of June 30, 2004, the most recent date for which published data is
available, Coastal Federal held the largest share of deposits, a 16.4% share, in
Horry County, S.C. according to the Federal Deposit Insurance Corporation.
Coastal Federal also held the third highest market share of deposits in
Brunswick County, N.C. with an 8.9% share. The Bank faces strong competition in
the attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits and loans has
historically come from other financial institutions located in its primary
market area. The Bank estimates that there are over 89 offices of other
financial institutions in Horry County, and 29 offices in Brunswick County.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's competition
for loans comes principally from other financial institutions, mortgage banking
companies and mortgage brokers.
Personnel
As of September 30, 2004, the Company had 354 full-time Associates and 19
part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision. The Bank is subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and the Federal Deposit Insurance Corporation, as
the deposit insurer. The Bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund managed by the Federal Deposit Insurance Corporation. The Bank must file
reports with the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other financial institutions. The Office of
Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
28
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation or the Congress, could have a material adverse impact on
the Company, the Bank and their operations. Certain of the regulatory
requirements applicable to the Bank and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to OTS regulated institutions and their holding companies set forth
in this Form 10-K does not purport to be a complete description of such statutes
and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of an OTS regulated institution after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding companies may only engage in such activities.
The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies
existing prior to May 4, 1999, so long as the Bank continues to comply with the
QTL Test. The Company does qualify for the grandfathering. Upon any
non-supervisory acquisition by the Company of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the Office of Thrift Supervision, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain activities authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another financial
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and
29
future prospects of the Company and institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to the Company. In addition, the financial impact of a holding company
on its subsidiary institution is a matter that is evaluated by the Office of
Thrift Supervision and the agency has authority to order cessation of activities
or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the Office of Thrift Supervision if any
person (including a company), or group acting in concert, seeks to acquire 10%
or more of the Company's outstanding voting stock, unless the Office of Thrift
Supervision has found that the acquisition will not result in a change of
control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, which implemented legislative reforms
intended to address corporate and accounting fraud, restricts the scope of
services that may be provided by accounting firms to their public company audit
clients and any non-audit services being provided to a public company audit
client will require preapproval by the company's audit committee. In addition,
the Sarbanes-Oxley Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the Securities and Exchange Commission, subject to civil and criminal
penalties if they knowingly or willingly violate this certification requirement.
Under the Sarbanes-Oxley Act, bonuses issued to top executives before
restatement of a company's financial statements are now subject to disgorgement
if such restatement was due to corporate misconduct. Executives are also
prohibited from insider trading during retirement plan "blackout" periods, and
loans to company executives (other than loans by financial institutions
permitted by federal rules and regulations) are restricted. The legislation
accelerates the time frame for disclosures by public companies and changes in
ownership in a company's securities by directors and executive officers.
The Sarbanes-Oxley Act also increases the oversight of, and codifies
certain requirements relating to audit committees of public companies and how
they interact with the company's "registered public accounting firm." Among
other requirements, companies must disclose whether at least one member of the
committee is a "financial expert" (as such term is defined by the Securities and
Exchange Commission) and if not, why not.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
Federal Savings Institution Regulation
Business Activities. Federal law and regulations govern the activities of
federal savings banks. These laws and regulations delineate the nature and
extent of the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require their regulated institutions to meet three minimum
30
capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS examination rating
system) and an 8% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below also establish, in effect, a minimum 2%
tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS system), and, together with the risk-based
capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of
Thrift Supervision regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The OTS has authority to establish higher capital requirements where it
determines that the circumstances of a particular institution require it. At
September 30, 2004, the Bank met each of its capital requirements. See Note 14
of the Notes to Consolidated Financial Statements for further information.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, an institution that has a ratio of total capital
to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." An institution that has a total
risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or
a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and an institution that has a tangible
31
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the Office of Thrift
Supervision is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semi-annually by the Federal Deposit Insurance Corporation and currently range
from zero basis points for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that OTS regulated institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. Such an institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily marketable collateral. At
September 30,
32
2004, the Bank's limit on loans to one borrower was $16.0 million, and the
Bank's largest aggregate outstanding balance of loans to one borrower was $10.5
million.
QTL Test. The HOLA requires OTS regulated institutions to meet a qualified
thrift lender test. Under the test, such an institution is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
An institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of September 30, 2004, the Bank met the qualified thrift lender test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a regulated
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of Thrift
Supervision is required prior to any capital distribution if the institution
does not meet the criteria for "expedited treatment" of applications under
Office of Thrift Supervision regulations (i.e., generally, examination ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with Office of Thrift Supervision. If an application is
not required, the institution must still provide prior notice to Office of
Thrift Supervision of the capital distribution if, like the Bank, it is a
subsidiary of a holding company. In the event the Bank's capital fell below its
regulatory requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the Office of Thrift Supervision
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the Office of Thrift Supervision
determines that such distribution would constitute an unsafe or unsound
practice.
Assessments. OTS regulated institutions are required to pay assessments to
the Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the institution's
total assets, including consolidated
33
subsidiaries, as reported in the Bank's latest quarterly thrift financial
report. The assessments paid by the Bank for the fiscal year ended September 30,
2004 totaled $224,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-OTS
regulated institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the institution's capital
and surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law. The purchase of
low quality assets from affiliates is generally prohibited. The transactions
with affiliates must be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, OTS regulated
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no such
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over their regulated institutions and has the authority to bring
actions against the institution and all institution-affiliated parties,
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order, to removal of
officers and/or directors, to institution of receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. The Federal Deposit Insurance Corporation has the
authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action to be taken with respect to a particular regulated
institution. If the Director does not take action, the Federal Deposit Insurance
Corporation has authority to take
34
such action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a regulated institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to $500, 1.0%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at September 30, 2004 of $16.9 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require OTS regulated institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve ratio is assessed on net transaction accounts up to and including
$45.4 million;
35
a 10% reserve ratio is applied above $45.4 million. The first $6.6 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The amounts are adjusted
annually. The Bank complies with the foregoing requirements.
Privacy Requirements of the GLBA
The Gramm-Leach-Bliley Act of 1999 provides for sweeping financial
modernization for commercial banks, savings banks, securities firms, insurance
companies, and other financial institutions operating in the United States.
Among other provisions, the Gramm-Leach-Bliley Act places limitations on the
sharing of consumer financial information with unaffiliated third parties.
Specifically, the Gramm-Leach-Bliley Act requires all financial institutions
offering financial products or services to retail customers to provide such
customers with the financial institution's privacy policy and provide such
customers the opportunity to "opt out" of the sharing of personal financial
information with unaffiliated third parties.
Anti-Money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the
"USA PATRIOT Act") significantly expands the responsibilities of financial
institutions, including savings and loan associations, in preventing the use of
the U.S. financial system to fund terrorist activities. Title III of the USA
PATRIOT Act provides for a significant overhaul of the U.S. anti-money
laundering regime. Among other provisions, it requires financial institutions
operating in the United States to develop new anti-money laundering compliance
programs, due diligence policies and controls to ensure the detection and
reporting of money laundering. Such required compliance programs are intended to
supplement existing compliance requirements, also applicable to financial
institutions, under the Bank Secrecy Act and the Office of Foreign Assets
Control Regulations. We have established policies and procedures to ensure
compliance with the USA PATRIOT Act's provisions, and the impact of the USA
PATRIOT Act on our operations has not been material.
Other Regulations
Interest and other charges collected or contracted for by Coastal Federal
are subject to state usury laws and federal laws concerning interest rates.
Coastal Federal's loan operations are also subject to federal laws applicable to
credit transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending credit;
o Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies; and
o Rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of Coastal Federal also are subject to the:
o Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
o Electronic Funds Transfer Act and Regulation E promulgated thereunder,
which governs automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services; and
o Check Clearing for the 21st Century Act (also known as "Check 21"), which,
effective October 28, 2004, gives "substitute checks," such as digital
check images and copies made from that image, the same legal standing as
the original paper check.
TAXATION
Federal Taxation
General. The Company and the Bank report their income via a consolidated
return on a fiscal year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad Debt
Reserves, please refer to Note 12 of the Company's Annual Report to Stockholders
for the fiscal year ended September 30, 2004.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method; or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Nondividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
dividends to the Company that would reduce amounts appropriated to the Bank's
bad debt reserve and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income attributable to
an Excess Distribution is an amount that, when reduced by the tax attributable
to the income, is equal to the amount of the distribution. Thus, if, the Bank
makes a "nondividend distribution," then approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and local
taxes). See "Regulation" for limits on the payment of dividends by the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Generally,
36
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
State Income Taxation. South Carolina has adopted the Code as it relates to
OTS regulated institutions, effective for taxable years beginning after December
31, 1985. Coastal Federal is subject to South Carolina income tax at the rate of
6% and North Carolina income tax at a rate of 6.9%. This rate of tax is imposed
on OTS regulated institutions in lieu of the general state business corporation
income tax.
For information regarding income taxes payable by Coastal Federal, see Note
12 of the Notes to Consolidated Financial Statements.
Audits. There have not been any audits of the Company's federal or state
income tax returns during the past five years.
Item 2. Properties
- ------------------
The principal offices of the Company are located in a 25,000 square foot
Main Office at 2619 Oak Street in Myrtle Beach, SC. This facility also houses
Coastal Mortgage Bankers and Realty Co, Inc, Coastal Investor Services, a
division of Coastal Federal Bank, and many corporate functions. Several of the
Bank's operations groups, including loan and deposit servicing, human resources,
marketing, and residential lending administration, are in separate buildings
owned by the Bank in Myrtle Beach. The Bank also owns a facility in Conway, SC,
which houses its Item Processing and Technology functions.
At September 30, 2004, the Bank operated 13 branches in South Carolina and
5 branches in North Carolina. Of these, 4 are leased and 14 are owned.
The net book value of the Company's investment in office, properties and
equipment totaled $18.8 million at September 30, 2004. See Note 6 of the Notes
to the Consolidated Financial Statements. Coastal Federal uses the services of
an independent data processing service to process customer records and monetary
transactions, post deposit and general ledger entries and record activity in
installment lending, loan servicing and loan originations.
37
Item 3. Legal Proceedings
- -------------------------
The Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. Based upon
current information received from counsel representing the subsidiaries in these
matters, the Company believes none of the lawsuits would have a material impact
on the Company's financial status.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
- --------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
The information contained under the section captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual Report to Stockholders for the Fiscal Year Ended September 30, 2004
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
- -------------------------------
The information contained in the section captioned "Financial Highlights"
in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's Discussion
and Analysis" in the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The consolidated financial statements contained in the Annual Report which
are listed under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
38
The registrant has not, within the 24 months before the date of the most
recent financial statements, changed its accountants, nor have there been any
disagreements on accounting and financial disclosure.
Item 9A. Evaluation of Disclosure Controls and Procedures and Changes in
- --------------------------------------------------------------------------------
Internal Controls
-----------------
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the year ended September 30, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
- --------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information called for by Item 10 with respect to directors and Section
16 matters is set forth in the Registrant's Proxy Statement for its 2005 Annaul
Meeting of Shareholders under the caption "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance", respectively, and is hereby
incorporated by reference. The information called for by Item 10 with respect to
the indentification of the members of the Registrant's Audit Committe and the
presence of an audit committee financial expert is set forth in the Registrant's
Proxy Statement for the 2005 Annual Meeting of Shareholders under the captions
"Committees of the Board of Directors" and is hereby incorporated by reference.
Certain executive officers of the Bank also serve as executive officers of
the Corporation. The day-to-day management duties of the executive officers of
the Company and the Bank relate primarily to their duties as to the Bank. The
executive officers of the Company and the Bank are elected annually by the
respective Boards of
39
Directors and hold office until their successors have been elected and qualified
or until they are removed from office.
40
Executive Officers of the Registrant
- ------------------------------------
Name, Age and Position Business Experience
- ---------------------- -------------------
Michael C. Gerald, 55 Mr. Gerald has been associated with
President, Chief Executive Coastal Federal since 1974 and serves as
Officer and a Director Director, President and Chief Executive
Officer of the Corporation and Bank. Mr.
Gerald also serves as Director and
President of Coastal Mortgage Bankers &
Realty Company, Inc., as Director and
President of Coastal Real Estate
Investment Corporation, and as a
Director of Coastal Retirement, Estate
and Tax Planners, Inc. He currently
serves on the Board of Visitors of
Coastal Carolina University's Wall
School of Business, as Chairman of the
Board of Directors of the Waccamaw
Community Foundation, on the Board of
Directors of the Coastal Education
Foundation, and on the Board of Trustees
of the USC Business Partnership
Foundation.
Jimmy R. Graham, 56, Mr. Graham serves as Executive Vice
Executive Vice President and President and Chief Information Officer
Chief Information Officer of Coastal Federal. Mr. Graham serves as
Executive Vice President of Coastal
Financial Corporation. He has been
associated with the bank since 1977.
Jerry L. Rexroad, CPA, 44, Mr. Rexroad joined the Company in April
Executive Vice President and 1995 and is Executive Vice President and
Chief Financial Officer Chief Financial Officer of Coastal
Federal and Coastal Financial
Corporation. Mr. Rexroad also serves as
the Chief Financial Officer and a
Director for Coastal Mortgage Bankers &
Realty Company, Inc., Coastal Investor
Services, Inc., Coastal Planners Holding
Corporation, Coastal Retirement Estate
and Tax Planners, Coastal Federal
Mortgage, Coastal Real Estate Investment
Corporation and President of Coastal
Federal Holdings Corporation. He is a
Past Chairman of the Board of Directors
for Junior Achievement of Horry County
as well as Past Chairman of the Board of
Directors for Junior Achievement of
Greenville. Mr. Rexroad is a Director of
PowerHouse Ministries, Inc. and Chairman
of the Board of Deacons at Grand Strand
Baptist Church. He is a certified public
accountant, and is a member of the AICPA
and SCACPA. Prior to joining the
Company, Mr. Rexroad was a partner with
KPMG LLP where he was partner in charge
of the Financial Institutions practice
in South Carolina.
41
Phillip G. Stalvey, 48, Mr. Stalvey is Executive Vice President
Executive Vice President and Banking Group Leader for the Bank.
and Banking Group Leader He also serves as an Executive Vice
President of the Corporation and is a
director of Coastal Federal Mortgage and
Coastal Investor Services, Inc. He has
been associated with Coastal Federal for
the past 23 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church and a
member of the Myrtle Beach Air Force
Base Redevelopment Authority.
Steven J. Sherry, 53 Mr. Sherry joined the Company in May
Executive Vice President and 1998 and is Executive Vice President and
Director of Marketing Director of Marketing for the Bank. He
also serves as Executive Vice President
and Chief Marketing Officer for Coastal
Financial Corporation. Mr. Sherry is a
member of the Bank Marketing
Association. He is active with Horry
County United Way and serves on the
Executive Board of the Franklin G.
Burroughs-Simeon B. Chapin Art Museum.
Mr. Sherry holds numerous achievement
awards for marketing and advertising.
Susan J. Cooke, 54 Ms. Cooke is Senior Vice President and
Senior Vice President and Corporate Secretary for Coastal Federal
Corporate Secretary and for Coastal Financial Corporation,
Corporate Secretary for Coastal Mortgage
Bankers & Realty Company, Inc., and
Coastal Investor Services, Inc. Ms.
Cooke has been employed with Coastal
Federal for seventeen years. She is a
member of the American Society of
Corporate Secretaries, Inc., the
National Association for Female
Executives, and is a Board Member of the
Community Kitchen of Myrtle Beach, Inc.
Robert D. Douglas, 45 Mr. Douglas joined the corporation in
Executive Vice President June 1994 and serves as Executive Vice
Human Resources/Coastal President of the Bank and Coastal
Federal University Group Financial Corporation. He previously
served as Chairman of the Human
Resources Committee of the South
Carolina Community Bankers Association.
He has served on various advisory
committees for the Horry County Drug and
Alcohol Commission, the South Carolina
Employment Security Commission, Coastal
Carolina and Horry Georgetown Technical
College, and the Grand Strand Area
Chamber of Commerce. He is a member of
the Coastal Organization for Human
Resources Management and serves as a
member of Coastal Carolina University
Career Services Advisory Board.
42
The Company has adopted a Code of Ethics, a copy of which is incorporated by
reference to the September 30, 2003 Form 10-K filed on December 22, 2003. The
Company intends to disclose any changes or waivers from the Code of Ethics in a
report on Form 8-K.
Item 11. Executive Compensation
- -------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" of the Proxy
Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
(d) Equity Compensation Plan Information as of September 30, 2004
- ----------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to equity compensation plans
be issued upon exercise Weighted-average price (excluding securities
of outstanding options, of outstanding options, reflected in column (a))
warrants and rights warrants and rights (d)
Plan Category (b) (c)
(a)
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,903,588 $7.77 710,210
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security N/A N/A N/A
holders
- ----------------------------------------------------------------------------------------------------------------
Total 1,903,588 $7.77 710,210
- ----------------------------------------------------------------------------------------------------------------
43
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Auditing and Related Fees" in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
1. Report of Independent Registered Public Accounting Firm (1)
2. All Financial Statements (1)
(a) Consolidated Statements of Financial Condition as of September
30, 2003 and 2004.
(b) Consolidated Statements of Operations for the Years Ended
September 30, 2002, 2003, 2004.
(c) Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended September 30, 2002, 2003, 2004.
(d) Consolidated Statements of Cash Flows for the Years Ended
September 30, 2002, 2003, 2004.
(e) Notes to Consolidated Financial Statements.
3. All Schedules have been omitted, as the required information is either
inapplicable or included in the Notes to consolidated Financial
Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation (1)
3 (b) Certificate of Amendment to Certificate of Incorporation
of Coastal Financial Corporation (5)
3 (c) Bylaws of Coastal Financial Corporation (1)
44
10 (a) Employment Agreement with Michael C. Gerald (7)
(b) Employment Agreement with Jerry L. Rexroad (7)
(c) Employment Agreement with Phillip G. Stalvey (7)
(d) Employment Agreement with Steven J. Sherry (7)
(e) Employment Agreement with Jimmy R. Graham (7)
(f) 1990 Stock Option Plan (2)
(g) Directors Performance Plan (3)
(h) 2000 Stock Option Plan (4)
(i) Loan Agreement with Bankers Bank (6)
13 Annual Report to Stockholders for the Fiscal Year Ended September
30, 2004
14 Code of Ethics (7)
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
31 (a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31 (b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 (a) Section 1350 Certification of Chief Executive Officer
32 (b) Section 1350 Certification of Chief Financial Officer
(1) Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
(2) Incorporated by reference to 1995 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1995.
(3) Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.
45
(4) Incorporated by reference to the proxy statement for the 2000 Annual
Meeting of Stockholders.
(5) Incorporated by reference to the March 31, 1998 Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998.
(6) Incorporated by reference to the December 31, 1997 Form 10-Q filed with the
Securities and Exchange Commission on February 13, 1998.
(7) Incorporated by reference to the September 30, 2003 Form 10-K filed with
the Securities and Exchange Commission on December 22, 2003.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 9, 2004 By: /s/Michael C. Gerald
--------------------
Michael C. Gerald
President/Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Michael C. Gerald By: /s/Jerry L. Rexroad
-------------------- -------------------
Michael C. Gerald Jerry L. Rexroad
President/Chief Executive Executive Vice President
Officer And a Director And Chief Financial Officer
(Principal Executive (Principal Financial and
Officer) Accounting Officer)
Date: December 9, 2004 December 9, 2004
By: /s/James T. Clemmons By: /s/Frank A. Thompson, II
-------------------- ------------------------
James T. Clemmons Frank A. Thompson, II
Chairman of the Board Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/James C. Benton By: /s/James P. Creel
------------------ -----------------
James C. Benton James P. Creel
Director Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/G. David Bishop By: /s/James H. Dusenbury
------------------ ---------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/E. Lawton Benton By: /s/J. Robert Calliham
------------------- ---------------------
E. Lawton Benton J. Robert Calliham
Director Director
Date: December 9, 2004 Date: December 9, 2004
47